RCM: Consider This

Through trial and error, business officers have learned a number of lessons about operating with responsibility center management.

By Margo Vanover Porter

If you've been hearing a lot about responsibility center management (RCM)—or have read the articles on this topic in the May 2013 Business Officer—you may be thinking it's time to consider this budget model for all or parts of your institution. You'll probably also benefit from the advice of others who have been there and done that. Here's what several higher education business officers have to say about moving to responsibility center management:

Examine your motives for change. "If you look at it as only a growth model, RCM does reward people for growing revenue," says Robert Ambach, senior vice president of administration and finance, University of Cincinnati. "In a dean's mind, growing revenue doesn't necessarily equate to supporting quality. If you have larger class sizes, does that reduce the quality of instruction?"

Ambach points out that although his institution hasn't seen class sizes grow significantly, that is one of the arguments used by deans opposed to an RCM-like model.

Ensure that support units receive adequate funding. "One of the issues from my side of the house is that I have no way of generating revenue in my administrative units," Ambach says. "When a 4 percent budget cut is handed out across the institution, the model is structured so that the revenue-generating colleges can basically avoid the budget cut. If I get a 4 percent budget cut, I have to reduce my budget by 4 percent. It's not applied equally across income generators and supporters. The overhead category, if not properly structured and not reinvested into by the colleges that generate revenue, could end up reducing the support function."

At the University of Cincinnati, the finance office has warded off this potential problem by suggesting to the deans, "Let's put aside $2 million of next year's new revenue growth to buffer these non-revenue-generating units." Each year the buffer is different, Ambach explains. "We have to put together a list and go through a presidential budget hearing process in which each of the vice presidents comes in to make his or her case. Enrollment management and public safety have been buffered. Even some of the facilities aspects of the university have been buffered."

Consider the current economic conditions. "Everybody says, 'Don't start RCM in a down economy when you're having budget cuts,'" says Sheri Austin, assistant vice president and director of university budgets, University of Florida, Gainesville. "There is some truth to that. People do confuse the issue, wondering, 'Is it RCM that is hurting my budget?'"

Make the first year free. "What scares a lot of deans is a concern about rebasing or changing the base budget of a college because it doesn't earn enough revenue and is running a deficit," Ambach says. "No one believes they have enough resources to do their jobs now. If you are one of the colleges or units that, through the methodology, appears to be subsidized, it really strikes fear."

As a result, Cincinnati committed not to rebase initially. "The first year we didn't make any changes in budget or hold people accountable to the numbers that came out," he explains. "We simply wanted people to see what the numbers looked like on an actual basis, versus just running a straw man with historical data. By doing that, people could see that they weren't being punished because of a new budget system. That was helpful."

The second year, leaders once again decided against rebasing to make certain colleges profitable or reach breakeven. "We've accepted, if you will, on some level that some colleges are subsidized and others aren't," he says. "We picked that fiscal year and said, 'This is what you brought in last year as revenue. At a minimum, we expect you to bring that in the following year, plus any inflation in tuition cost.'"

Make allowances, if necessary, for special situations. "Our liberal arts college has an interesting structural problem," explains Matthew Fajack, vice president and chief financial officer, University of Florida. "The state of Florida, which wants to lower the costs for degrees, has pushed the amount of hours we have to accept from community colleges. So we have students coming in with 30 to 60 hours credit who have already achieved most of their general education requirements. That number grows every year.

"As a result," continues Fajack, "our liberal arts college is teaching fewer and fewer students every year, but because of tenure and other employment practices, the number of students is diminishing faster than they can reduce their professional staff and faculty. They face a unique problem."

Ensure that your deans have financial acumen. "We've had some turnover in deans because the new system really requires deans to be much smarter about how they manage their budgets," says Lawrence Johnson, interim senior vice president and provost, University of Cincinnati. "It's not just about being the academic leader now, although, yes, that is important. You also have to be a manager of your budget. It's made our deans very cognizant of what generates funds and what doesn't—although in no way, shape, or form are we trying to make everything profitable."

Johnson adds that the institution has lost deans for a variety of reasons. But in most cases, not really understanding their budgets and how to manage them became factors. "Not only do deans have to have the academic gravitas and the trust of the faculty, they need to be good stewards of their money," he emphasizes. "Whether you're going into performance-based [or RCM] budgeting or not, someone with that expertise is the dean you need to hire."